Washington, DC - The top 1 percent of tax filers earned about 22.8 percent of the nation's income in 2007 (the latest IRS data available), and paid 40.4 percent of all federal income taxes - more than the bottom 95 percent of tax filers combined, according to a Tax Foundation analysis of just-released IRS data.
Do you know why this is great news for the government? Granted, getting such a large fraction of revenue from top earners makes tax revenues more volatile. But why is income inequality great for the leviathan? Think about it. I'll explain below.
You might think that the top 1% pays to fund government programs for a large chunk of the rest of the population. But there's more going on here than that.
Both income and income tax shares for the top 1 percent of tax returns (AGI over $410,096) hit all-time highs in 2007. In Fiscal Fact No. 183, "Summary of Latest Federal Individual Income Tax Data," Tax Foundation Senior Economist Gerald Prante notes that the record-setting trend for income and income tax shares is likely to end with 2007, given the economic downturn in 2008.
"This pattern at the top of the income spectrum is the same during almost every recession and recovery," according to Prante. "Unlike middle-income wage-earners whose incomes and tax liabilities are fairly steady, high-income people have incomes and tax liabilities that fluctuate wildly with the economy. The sharp rise in federal government tax revenue from 2003 to 2007 is likely to be followed by a substantial dip in 2008, 2009 and perhaps 2010 as the economy struggles through the worst recession since the early 1980s."
Unstable revenue, sure. But since the top earners earn such a large fraction of total income inequality makes it easier for government to raise revenue. Imagine income was more evenly distributed. In that case government would need to anger more people with higher tax rates in order to collect just as much revenue. Yes, inequality is a ravenous democratically elected government's friend because inequality allows high tax rates on a small fraction of the population to bring in such a large chunk of revenue. No need to anger most voters in order to collect a lot of tax revenue.
141,000 tax returns (probably some of those are couples) bring in a fifth of all revenue but only 12% of all adjusted gross income.
Fiscal Fact No. 183, available online at http://www.taxfoundation.org/publications/show/250.html, also takes a look for the first time at the top 0.1 percent of tax returns (the top 10 percent of the top 1 percent), which amounts to only 141,000 tax returns, but accounts for nearly 12 percent of AGI earned and around 20 percent of the nation's federal individual income taxes.
I expect inequality to increase because demographic trends mean a larger fraction of the population will not have high school diplomas. Texas style demographics mean greater wage inequality. Great for the leviathan.
Savers are paying a big price to bail out bank stockholders.
Indeed, a year ago, a six-month certificate of deposit earned, on average, 3.53%, according to Bankrate.com (RATE). Today, that's down to 2.03%. A one-year CD that earned 3.75% at this point in 2007 was offered for as little as 1.92% in April, before inching up to its present 2.38%. It's hardly a secret that banks are only able to pay out such pittances thanks to depositors' knee-jerk desire for security: "Hey, I might be earning crumbs on my cash, but at least I'm not losing money."Sure you are. Wholesale inflation has soared 9.8% in the past 12 months, the highest clip since 1981. The more widely cited consumer price index jumped to 5.6%. In other words, while your saved buck was adding 2 cents or so on one end (and even less after taxes), three times as much was getting singed off the other end of that dollar bill.
Isn't there some other way to save the financial system from collapse that involves more pain for those who made the mistakes that caused this state of affairs and less pain for those who were prudent and who lived within their means?
Update: The Congressional creatures Fannie Mae and Freddie Mac, semi-part of government, misrepresented their financial positions.
Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.
What, companies that were like public-private partnerships, working according to Congressional demands to benefit society, could be so corrupt? But wait, it has happened before, recently even.
Accusations of improper accounting are not new for either company. Earlier this decade, both companies paid large fines and ousted their top executives after accounting scandals.
Fool me once shame on you. Fool me twice shame on me. But I'm sure the Congressional allies of Fannie and Freddie feel no shame and want to make Fannie and Freddie once again ladle out risky loans to favored groups.
Congress pushed for the flood of credit to poor people that made the failure of Freddie and Fannie inevitable. So if you are getting low interest on bank deposits Congress is to blame.
Over the previous years, as the housing bubble inflated, Fannie and Freddie stepped up their purchases of the risky but profitable subprime and alt-A loans that were at the root of the mortgage crisis. Though Congress had just pushed Freddie and Fannie to accelerate purchases of loans to give the housing market a boost, Mr. Paulson was now urging lawmakers to establish stronger oversight and push the companies to raise more capital.
The intent of Congress was to help poor black and Hispanic people buy homes. (see more here). The result was disaster for those poor people and for savers and many other home buyers.
Dalton Conley, chairman of NYU’s sociology department, says the most affluent work the longest hours.
But what’s different from Weber’s era is that it is now the rich who are the most stressed out and the most likely to be working the most. Perhaps for the first time since we’ve kept track of such things, higher-income folks work more hours than lower-wage earners do. Since 1980, the number of men in the bottom fifth of the income ladder who work long hours (over 49 hours per week) has dropped by half, according to a study by the economists Peter Kuhn and Fernando Lozano. But among the top fifth of earners, long weeks have increased by 80 percent.
This is a stunning moment in economic history: At one time we worked hard so that someday we (or our children) wouldn’t have to. Today, the more we earn, the more we work, since the opportunity cost of not working is all the greater (and since the higher we go, the more relatively deprived we feel).
I personally would rather work more hours to get paid more money. But I've had jobs where my employer was happy to take the greater amount of work product I produced by working more hours without paying me any more for doing it. So how many of the people working longer hours are self-employed or have earnings very directly tied to performance? For example, salesmen working on commission have strong incentives to work longer hours.
To put it another way: Do higher income people work in more incentivized environments? Even if higher income people work in more incentivized environments that does not mean that is the initiating cause of why they work longer hours. It would be that they have a stronger preference for jobs and occupations where they can make more by working more. So lower income people of similar levels of talent put into similar jobs might not choose to work as hard at the same tasks and with the same incentives.
So then what caused the shift in work hours for higher and lower income workers? One possibility: changes in tax law. Starting in the Carter Administration capital gains taxes were cut and later under Ronald Reagan income taxes were cut on higher income people. This probably unleashed a lot of suppressed desire to work among those who have the potential for very high productivity.
But tax law changes probably don't explain the decline in hours worked by lower income workers. The men in the bottom fifth have experienced a number of changes. First off, a huge influx of cheap unskilled immigrant labor has lowered the returns on working and has reduced the dignity of manual labor. Second, the decline in marriage reduces the number of men in marriages with children with the pressures to bring home the income needed to feed and house the family. The huge decline in black male labor market participation explains part of the decline in hours worked by the poorest. That decline in labor market participation has been accompanied by an order of magnitude increase in black male incarceration.
I'm sure your heart bleeds for the people who can only afford one million dollar apartments. The poor dears are cutting back on their limo usage in New York City.
Buyers this year have already closed on 71 Manhattan apartments that each cost more than $10 million, compared with 17 apartments in that price range during all of 2007.
...
That said, providers of luxury goods reported anecdotal evidence of a widening gap between the merely rich and the ultrarich. Clifford Greenhouse, who owns a household-staff employment company, said he suspects that the merely rich might be starting to lag behind their far richer counterparts, and are trimming their budgets. He cited reduced demand for chauffeurs — a relatively small-ticket service — yet ever-strong demand for private chefs, butlers and “household managers.”
Darren Sukenik, a real estate broker with Prudential Douglas Elliman, said that while business may be slower for clients with a mere million to spend on apartments, none of his clients with budgets of more than $2.5 million have stopped shopping. Seth Semilof, the publisher of Haute Living, a luxury magazine, said that luxury car dealerships that advertise with him are pushing Bentleys and Rolls-Royces at the expense of less-extravagant cars like the BMW 5 Series.
Why even mention the BMW 5 Series? Surely nothing below the $110,000.00 BMW 750 Li is worth considering unless you just want a sports car. Why isn't there a $300,000 hybrid Rolls or Bentley so that the ultrarich can be environmentally conscious by boosting their gasoline mileage up to 12 or 15 miles per gallon?
The Tax Foundation reports that the percentage of US federal income taxes the top `% pay is more than the amount paid by the bottom 90%.
Washington, DC, October 4, 2007 - New data released by the IRS today offers interesting insights into the distributional spread of the federal income tax burden, new analysis by the Tax Foundation shows.
Summary of Federal Individual Income Tax Data, 2005 (updated October 2007)
Number of Returns (thousands)
AGI
($ millions)
Income Taxes Paid
($ millions)
Group's Share of Total AGI
Group's Share of Income Taxes
Income Split Point
All Taxpayers
132,611,637
$7,507,958
$934,703
100.00%
100.00%
-
Top 1%
1,326,116
$1,591,711
$368,132
21.20%
39.38%
above $364,657
Top 5%
6,630,582
$2,683,934
$557,759
35.75%
59.67%
above $145,283
Top 10%
13,261,164
$3,487,010
$657,085
46.44%
70.30%
above $103,912
Top 25%
33,152,909
$5,069,455
$803,772
67.52%
85.99%
above $62,068
Top 50%
66,305,819
$6,544,824
$906,028
87.17%
96.93%
above $30,881
Bottom 50%
66,305,818
963,134
28,675
12.83%
3.07%
below $30,881
Source: IRS
If you want to break into the top 1% club then you'll have to aim for $365k per year. But remember, unless a recession happens by the time you get up to that level the threshold for top 1% membership will have risen.
Growing inequality is a boon for federal tax collections because the higher income people are taxed at higher percentage rates. The same dollar earned by a high income person nets the IRS much more in taxes collected than if a lower income person in a low tax bracket earns that dollar. The top 1% alone paid almost 40% of total federal income taxes. This is why such a big chunk of the electorate isn't strongly opposed to more federal spending. They know they won't be the ones paying for it.
The table above shows that the top-earning 25 percent of taxpayers (AGI over $62,068) earned 67.5 percent of nation's income, but they paid more than four out of every five dollars collected by the federal income tax (86 percent). The top 1 percent of taxpayers (AGI over $364,657) earned approximately 21.2 percent of the nation's income (as defined by AGI), yet paid 39.4 percent of all federal income taxes. That means the top 1 percent of tax returns paid about the same amount of federal individual income taxes as the bottom 95 percent of tax returns.
The IRS data also shows increases in individual incomes across all income groups. Just as the highest earners lost the biggest percentage of their incomes during the recession of 2001, so they have prospered the most as the economy has continued to rebound. In sum, between 2000 and 2005, pre-tax income for the top 1 percent group grew by 19.1 percent. In the same time period, pre-tax income for the bottom 50 percent increased by 15.5 percent.
Will we reach a point where the top 1% are paying half of all income taxes?
You can see the full report here.
ANN ARBOR, Mich.—The rich really are getting richer and the poor are getting poorer, a new University of Michigan study shows.
The study—the most recent available analysis of long-term wealth trends among U.S. households—is based on data from the Panel Study of Income Dynamics, conducted by the U-M Institute for Social Research (ISR) since 1968.
Over the last 20 years, the net worth of the top two percentile of American families nearly doubled, from $1,071,000 in 1984 to $2,100,500 in 2005. But the poorest quarter of American families lost ground over the same period, with their 2005 net worth below their 1984 net worth, measured in constant 2005 dollars.
The poorest ten percent of families actually had a negative net worth—more liabilities than assets. The poorest 5 percent of American households had a negative net worth of a little more than $1,000 in 1984, compared to nearly $9,000 in 2005.
Does this effect hold up adjusted for race? White poor people are a rapidly dwindling percentage of the poor because blacks and especially Hispanics are increasing their proportions of the set of all poor people.
The average economic position of black householdsfell from 2003 to 2005. Note the shorter time period for this figure.
From 2003 to 2005, the average net worth of American families increased 12 percent, Stafford and Gouskova found. In constant 2005 dollars, overall average net worth, including home equity, rose from $275,600 to $309,600.
But during that period, the average net worth of African American households fell slightly, from $59,900 to $59,500. And the median net worth of households headed by high school drop-outs and by younger people, from ages 20 to 39, also declined.
Both white and black families had lower rates of participation in the stock market, but the rate of decline was stronger among black families. Slightly over six percent of black families owned stocks in 2003, compared with 5.3 percent in 2005—an 18 percent decline. Among white families, the percent owning stocks fell from 32 percent to 28 percent during the same period—a 12 percent drop.
People in their twenties are poorer than they used to be. But the college educated are making big gains.
The researchers also examined net worth dynamics across different age groups and educational levels. They found that the median household net worth of people in their 20s declined by nearly 30 percent, while the net worth of households headed by people in their 30s also fell slightly. The findings provide support for the widespread sense that it is harder than it used to be for younger people to establish themselves financially.
Those with some college education realized the strongest growth in family wealth. Their average net worth rose 31 percent during the period studied, to $341,700. College graduates showed a 10 percent rise in net worth, to $563,100 on average. But high school graduates showed only a modest increase in wealth, while the median wealth of high school drop-outs declined during the two-year period.
The smarter people can use increasingly powerful computers and other brain-enhancing tools to produce more and more. This makes brains more valuable in absolute and relative terms.
German unions used to band together with other unions and negotiate with management. But Der Spiegel reports that the unions which have the most skilled members are splitting off from the unions that have less skilled members.
First it was pilots, then doctors, now Germany's train drivers are breaking ranks to negotiate their own pay deals. As German skilled workers demand wage increases in line with their counterparts abroad, could this signal the end of collective bargaining?
German pilots and doctors compare themselves to pilots and doctors in other Western countries and want to make as much money as their foreign peers.
And in 2006 hospital doctors in Germany went on strike to protest the fact that their earnings were far below those doctors in other countries. In fact the relatively poor pay and difficult conditions had led to a exodus of doctors
(more...) leaving Germany for the UK, Scandinavia and elsewhere.
This trend suggests that industrialized countries with relatively lower levels of income inequality will become more like the countries which have greater income inequality. The differences in wages between the most and least skilled will increase. While language serves as a barrier that slows down labor mobility in Europe many of the most educated are bilingual or trilingual. For highly skilled occupations where workers can easily move wages will rise much more rapidly than wages for the least skilled.
Most feel from their standpoint that the American economy is getting worse.
A new Gallup Poll will only reinforce those who claim that while the rich get richer most Americans don't feel they are sharing in the growth in our economy. The stock market may be climbing and the unemployment remains relatively low, but 7 in 10 Americans believe the economy is getting worse -- the most negative reading in nearly six years.
Only one in three Americans rate the economy today as either excellent or good, while the percentage saying the economy is getting better fell from 28% to 23% in one month.
Oil and food prices are up. Even with the downturn in the housing market housing is much more expensive in inflation-adjusted terms in many parts of the country than it was 10 years ago. The influx of lower skilled immigrants has driven down wages at the lower end and lowered status versus the middle and upper classes.
Overall housing sales are down. But at the high end housing sales are still moderately brisk.
“The homes that are having a hard time selling are the average-priced homes,” said Vanessa Justice, a real estate agent with Pacific Union GMAC in the Bay Area, where the median house price is about $750,000. For upper-end homes, she said, “it’s actually pretty crazy right now.”
...
In the New York region, sales at the top end — that is, homes in the most expensive 5 percent of the market — have also been rising, while they have been falling in the middle and bottom of the market. The same is true in the San Jose, Calif.; Seattle; Denver; and Houston areas. In San Francisco, Los Angeles, Phoenix and Miami, high-end sales are down but not by nearly as much as sales in other price segments.
Parking space prices are booming in Manhattan.
In Houston, $225,000 will buy a three-bedroom house with a game room, den, in-ground pool and hot tub.
In Manhattan, it will buy a parking space. No windows, no view. No walls.
While real estate in much of the country languishes, property in Manhattan continues to escalate in price, and that includes parking spaces. Some buyers do not even own cars, but grab the spaces as investments, renting them out to cover their costs.
The social and economic distance between the classes is widening while the amount of shared experiences is falling. This trend is not compatible with a republic of citizens equal before the law.